Thank you, Yoshnori, please explain clearly the meaning of GVCs to a layman's understanding.

Dear Sebastain @Sebastain Uremandu

Thank you for posing this very basic question and giving me the chance to answer it.

A value chain is a network of productions and exchanges that ends to the production of a final good. As almost all industrial products are produced by using many kinds of materials, parts and components, each product has its own value chains. Before 1970's, the value chain of majority of products extended only within a country, if we excludes a few number of imported materials. Since 1970's the value chains began to extend beyond national boundaries. They grew very rapidly since 1990's and the value chain of some products now extends all over the world. Such a value chain is called global value chain.

For example, more than half of all i-Phones are made in China. Apple buys many components like the memory chip, the modem, the camera module, the microphone and the touch-screen controller from more than 200 suppliers around the world. An estimate tells that, out of a total of $370.25 total cost of i-Phone X, $110 goes to Samsung Electronics in South Korea for supplying displays, another $44.45 goes to Japan’s Toshiba Corp and South Korea’s SK Hynix for memory chips. The assembler in China, like Foxconn, gains value-added of only an estimated 3 to 6 percent of the manufacturing cost. (Reuters #BUSINESS NEWSMARCH 21, 2018 / 9:05 PM)

You can see how some of values chains are globalised. We talk often of globalization. There are many aspects in it. The real economy side of globalization is represented by the rapid growth of Global Value Chains (GVCs). Innomata (2017) tells that 60 per cent of global trade now consists of trade in intermediate goods and services.

GVCs have brought big consequences for economies participating to GVCs. Recent East and South East Asian economic development (including China) cannot be understood without the growth of GVCs. Climbing-up the GVC ladder is now a national strategy for some countries to avoid the middle-income trap.

Despite of the importance of GVCs, the traditional trade theories were rather incompetent in explaining the growth of GVCs. Three generations of trade theories (textbook Ricardian trade theory, Heckscher-Ohlin-Samuelson theory, and New trade theory) all excluded trade of intermediate goods by assumption. The theory of the fourth generation, called "New new trade theory," is in essence a theory of open economy of a country and cannot be a theory of GVCs. This explains why arguments on GVCs started in disciplines other than economics, like sociology, organizational theory and others. An economic theory that can explain growth of the GVCs is seriously required but no traditional theories can respond to this requirement. Hence my question. For more details, please read two reports in the references: Cabral (2016) and Inomata (2017).

Dear Yoshnori Shiozawa, thank you for your down to earth explanation of the meaning of GVCs. I have now understood its basic concept. However, it seems most LDCs if not all have been marginalised or have been left out in the network with industrialised countries like Chna, Japan, etc having the lion share of its trade benefits to their economies. What is your view on this?

Gianni, how do we bring in LDCs into network of GVCs so that they would not be left out in the new world trade order of GVCs among nations? Industrialized economies need to carry along LDCs in the whole set up of GVCs framework!

Dear Sebastain Uremadu,

• it seems most LDCs, if not all have been marginalized, have been left out in the network with industrialized countries like China, Japan, etc., having the lion share of its trade benefits to their economies. What is your view on this?

If you are asking me the development strategy of LDCs, I am not a right person to answer you. I have two reasons for this answer.

First, although I am keenly interested in economic development both of developed and developing countries, I am not a specialist in developing questions or strategies of developing countries and do not know in detail what is happening in those countries, especially in LDCs.

Second, this reason must be more crucial one. The growth of global value chains is only a specific aspect of the globalization. The globalization is now an environmental condition for the economic development of any nation. But, development is a highly synthetic overall process. It is hard to talk about the "lion's share” of benefits of GVCs.

For this complex problem, I believe we should learn from history. The best paper I know for the moment with this respect is @Kalim Siddiqui 's paper:

Kalim Siddiqui (2017) Globalisation, Trade Liberalisation and Economic Development in Developing Countries: An Overview. Journal of Economics Library 4(4): 514-529.

https://www.researchgate.net/publication/322907993_Globalisation_Trade_Liberalisation_and_Economic_Development_in_Developing_Countries_An_Overview

On some points on trade theories, I have some opinions different from his, but I think this is a very good overview on the historical experience of globalization.

If you have some specific questions on trade theories, I am happy to reply as long as I can.

You might want to review the work of Gary Gereffi

Dear Yoshinori, for a small open economy like Costa Rica, the positioning in GVCs has been a key element for a closer integration with the global economy and the attraction of FDI to strengthen the exports platform. It has also been a structural change in the way that international trade drives economic growth. I think the case of Costa Rica is interesting from your theoretical approach. A key element for success has been the creation of a high-skilled labor force to attract high value international companies. This publication can be of help for the discussion: Technical Report Costa Rica in Global Value Chains: An Upgrading Analysis

Best regards,

Thank you, David Field and Luis Rivera, for the information. I have many papers to read. When I have finished reading these papers, I will post my "impressions" on them. Please wait until then.

I am happy with all contributions. Thank you all.

I am now reading Gereffi's article Global value chains in a post-Washington Consensus world that Dr Fields recommended me. In this article, there is a very important remark about GVCs that I think would be a useful information for Dr Uremadu.

Richard Baldwin called the present globalization the Second Unbundling in opposition to the First Unbundling that took place in the late 19th century. The specific feature of the Second Unbundling is the emergence of GVCs. Gary Gereffi points out that the Second unbundling

• has opened up a radically new development path. Today, nations seek to industrialize by simply joining a supply chain to assemble final goods or make specialized inputs; they no longer try to build single-nation supply chains from scratch. (p.10)
• For most early industrializers, including the US, Germany and Japan, industrialization meant building relatively complete supply chains at home. (p.9)

Now late coming countries have totally different situation and possibilities. Of course, the competition among LDCs is more severe, because all countries are now allowed to join GVCs. However, I believe that Nigeria, the country with the biggest population among Sub-Saharan countries, will show a new path to industrialization and economic development for other Sub-Saharan countries. The number of population is in many aspects a privilege. You have the chance that other smaller countries cannot have.

I have read Gary Gereffi's paper Global value chains in a post-Washington Consensus world.

The paper is composed of five sections. Here is the list of sections (with two lineheads in section III):

I. Viewing the global economy through a value-chains lens?

II. Governing structures and increasing concentration in global value chains

III. Economic upgrading and the new geography of global production and trade

A new metric for GVC analysis: Value added trade

Shifting end markets and the regionalization of GVCs

IV. The impact of GVC analysis on the development agendas of international donors

V. Conclusions

The author has been a leader of investigations on globalization and has produced many articles and books. As I have posted in the last entry before this, the paper is rich in many thoughtful observations and comments. As an introduction to the topic related to GVCs, this is a very good paper.

Section I is a brief history on the globalization for these four decades. Washington Consensus is defined here as a neoliberal thought closely related to Export-Oriented Industrialization (EOI). Section II is arguments on typology of global value chains, which are author's main contribution to the GVC theme. Section III treats a relatively new but important strategic question that is to upgrade nations' participation to GVCs. Section IV explains that GVC analysis became an indispensable tool for the for international donors and organizations. Section V emphasizes that the world economic trend is changing after the economic crisis 2008-2009. The past leading economies are no more engines of growth. Instead, new countries including BRICS and other emerging countries are now beginning to lead the world economy. Gereffi concludes that Washington Consensus must be replaced by a new insight.

All these arguments are well organized and I have few points to oppose. However, I cannot say that this paper presents a theory that explains the driving force of the growth of GVCs. Gereffi is a sociologist. He analyzes organization problems of multi-national firms. His analysis of social responses of nations among globalization is excellent. But he presents few explanations on what drives the globalization and the rapid growth of GVCs. His analysis is always post factum. This may be inevitable, because the main driving forces of GVCs are economic and not sociologic. As Sónia Cabral (2016) remarked, "a comprehensive framework encompassing the specificities is still lacking."

I wonder why David M. Fields recommended me to read this paper. Is there other significant part that I have missed to read?

Jennifer Bair (ed) Frontiers in Commodity Chains

Thank you for the information. This book Jennifer Bair (ed)'s Frontiers in Commodity Chains is also very suggestive. Among 14 writers, 9 are sociologist and no economist was among them (except perhaps 2 researchers whose specialty we cannot know). What does this mean? Economists have not so far contributed to the study participated to the "voluminous literature" in global commodity chain studies.

The most simple explanation of this fact is that international trade theory has been incapable to analyse the emergence and development of global commodity chains. As I have argued in a previous post, the four generations of international trade theories have been excluding input trade by assumption. It is evident that global commodity chains cannot be analyzed by those theories. Sociologists, management scientists and historians were much freer than economists to observe the conspicuous phenomena that is global commodity chains.

Recent article by Daniel Nagel and Sorin Burnete

The Legacy of Conventional Textbook Trade Theory in the Light of Globalization

https://www.researchgate.net/publication/325573466_The_Legacy_of_Conventional_Textbook_Trade_Theory_in_the_Light_of_Globalization

is an interest paper which appeared in Journal of Modern Accounting and Auditing. Why did this paper appear in this Accounting journal? Was it rejected by the normal international economy journals? If so, it means that mainstream journals on international economy have lost even sensitivity to admit the importance of the issue.

I have read major parts of the book Jennifer Bair (ed) Frontiers in Commodity Chains, that Jonathan Daniel London recommended.

The first chapter Global Commodity Chains by the editor was illuminating. I came to know that the concept Commodity Chain was first coined by Terence Hopkins and Immanuel Wallerstein. Bair distinguishes three approaches on this trail: (1) the world-systems tradition, (2) global commodity chains approach and (3) global value chains analysis. This origin is surprising, but it also confirms my thesis stated in the last post. The fact that the inaptitude of traditional trade theories retarded economics people to recognize the emergence and importance of GVCs.

Wallerstein argues role of States in his chapter Protection Networks and Commodity Chains in the Capitalist World-Economy. Gary G. Hamilton and Gary Gereffi argues organizational process of GCCs. It is an analysis from economic sociology interest. I have no intention to deny those analyses but their analysis is focused on the results after the formation of GCCs. There were few argument on my question: the reasons of What drives the growth of Global Value Chains.

I have posted the following below the asterisks as a comment to paper by

Edward J. Balistreri, Christoph Böhringer, and Thomas Fox Rutherford 2017 Carbon policy and the structure of global trade. World Economy 41(1).

https://www.researchgate.net/publication/318732476_Carbon_policy_and_the_structure_of_global_trade/comments

I believe this is closely related to the present question.

********************************************************

I have read the abstract of this paper and the PPT presentation data of the same title that was reported at BC3 Summer School, 11th – 13th of July, 2016, San Sebastian. But the details of the arguments are irrelevant to my question, I post this comment.

You cite three "alternative trade paradigms": Heckscher-Ohlin (1933), Armington (1969) and Melitz (2003). I wonder if any of these tree can be a paradigm by which to analyze the "structure of global trade." To cite only one aspect of the problem, we see a rapid growth of global value chains. They are in essence network of production and trade across countries. These networks are possible only when inputs are traded and used in the production of other countries. Now, three paradigms you mentioned exclude input trade (or trade of intermediate goods) by assumption. In the case of Melitz(2003), the author assumes that " Structure of Global Trade." (Melitz, 2003, p.1699) There are no input goods and therefore no input trade. Armington model has no analysis of how international trade is organized. Heckscher-Ohlin (1933) and its variants are definitely a trade theory of final products.

If "the structure of international trade have important implications for the evaluation of climate policy," it would be necessary that you employ a theory that can analyze the emergence and growth of global value chains.

Please see my question

What drives the growth of Global Value Chains? Is there no comprehensive framework encompassing the specificities of GVCs?

https://www.researchgate.net/post/What_drives_the_growth_of_Global_Value_Chains_Is_there_no_comprehensive_framework_encompassing_the_specificities_of_GVCs

and the arguments there. Actually in my understanding, there are only two generaltheory which can treat input trade: Eaton and Kortum (2002) and my paper Shiozawa (2017). On the first paper, it has various defects as I have argued on it in the question page:

Why did Eaton and Kortum model perform so badly?

https://www.researchgate.net/post/Why_did_Eaton_and_Kortum_model_perform_so_badly

Please check Shiozawa (2017) and you may find a good tool for your analysis. You use Multi-regional Input-Output (MRIO) Analysis. If this analysis is to be well founded, it needs to assume stability of Input-Output analysis in the world level. As far as I know, the new theory of international values is the unique theory that can assure this kind of stability. See Shiozawa (2017) Section 15.

Let me also add that

Faye Duchin (2005) A world trade model based on comparative advantage with m regions, n goods, and k factors. Economic Systems Research 17(2): 141-162

is not a theory of economy if it is an analysis of Operations Research, because it simply assumes that all firms and countries produce according to the directives of some imaginative centers.

Dear Yoshinori,

I agree that theorizing on global value chains is at a very early stage of development. In the literature you can find either appreciative accounts of GVCs (works of Gereffi, global production networks school, qualitative studies of Humphrey, Schmitz etc.), or some very simple attempts to adjust traditional trade theories to the context of fragmentation (e.g. Baldwin; Grossman & Rossi-Hansberg 2008), mostly in GE framework.

In my opinion, none of these can merge so far properly macroeconomic dynamics, microeconomic technological change, and international aspects of trade in inputs, or of capital and knowledge flows.

Anyhow, I find your new theory of international values as a great starting point for further formal analyses. My view is that GVCs theory needs to endogenize investment and technical change (and in turn including the political economy of development).

Since the alleged "World Financial Crisis" in 2008 we can easily identify two major facts that influence all GVCs (1 and 2):

Thank you for your comment, Alexander Dill . Do you think GVCs are a phenomenon which can be fully explained solely by financial terms?

Yes, because in GVCs it's all about access to pre-financing market access and market shares, commodities and labour/patents.

Dear Alexander Dill, could you please give us the title or number of the mentioned UN IATF Working paper? It sounds extremely interesting

Here's the link:

https://developmentfinance.un.org/sites/developmentfinance.un.org/files/IATF%202018_Basel%20Institute_input.pdf

Following Shiozawa, I do beleive that GVCs are badly covered by traditional trade theory and that the answer may be (must be?) found by looking back at the classics. Applying Smith and Ricardo to develop a model of production prices, as Shiozawa does, is a good starting point. When production is segmented between various countries, trade policy becomes production microeconomics with borders.

But I am afraid there is an additional complexity which is rooted in the specificity of the capital structure of off-shoring relationship among GVCs. In particular, the existence of long-term contracts and cross-ownership which may influence the way prices are fixed. When trade takes place among affiliates, prices may diverge from the normal "cost plus mark-up" for a series of reasons, one of them being fiscal optimization. When contracts are of arm's lenght nature, mark-up will reflect also the respective negotiation power of the respective contractual parties.

So the task of finding an encompassing theory is formidable. But it is a very important task because the implications are important for a long list of topics ranging from economic development; trade theory; labour economics ; inflation, exchange rate and monetary policy, etc.

Dear Maciej

I think this integration is happening. There is a recent paper on GVCs and the exchange rate and one from ADBI last year(https://www.adb.org/sites/default/files/publication/390221/adbi-wp799.pdf).

Also see presentation by Ayhan Kose (https://cepr.org/sites/default/files/%28Panel_II%29_What_Do_GVCs_Mean_for_Macro_Policies.pdf)

Also the impact on labour is being reexamined.

We have tried to link GVCs with innovations, industrial policy and domestic market in our book: Global Value Chains and the Missing Links: Cases from Indian Industry (Link: https://rdcu.be/4fr5)

Regards,

Saon

Dear Saon, thank you for posting this paper. While National value chains are mostly financed by the local currency, Global value chains are financed in Dollar, Yen, Pound and Euro, the gap of course drives the trade politics:

• 'Free trade' is the best for countries with the fixed currencies and the right to print money for zero interests by their own central bank.
• ADB is driven by a colonial infrastructure politic. ADB finances governments, not the people. And so do the World Bank, the KfW and other development banks. Of course the major winners in ADB are China, Japan and South Korea because ADB finances their exports and accelerates their markets. E.g. Cambodia, Myanmar, Laos, Bangladesh, India, Afghanistan, Pakistan and Vietnam are regarded as the aunts in the value chain of the export countries.
• So what do you mean by 'integration'? The value chain is a colonial construction to exploit those who cannot influence their currency and their interest rate - and therefore have to deliver their labour and commodity at the lowest price. That only works with free access to the alleged 'markets'. Alleged, because these markets do not exist. Cambodia is not exporting machines and couldn't finance an industry to do so.

I came to know that there is another strand of research that studies global value chains with another name: Global Production Network (GPN).

Chapter Global Production Networks 2.0

Its main promoters are Henry Wai-chung Yeung , Neil Martin Coe and Martin Hess .

I came to know this paper:

Amador, J., and S. Cabral (2016) Global Value Chains: a Survey of Drivers and Measures. Journal of Economic Surveys 30(2): 278-301.

The first part of this paper is a good survey on divers of GVC growth, although some explanations are confused. It was inevitable because at the time this survey was written, the new theory of international values is not yet known and there were no unified theory that can treat input trade in a general way.

Amador and Cabral (2016) Global Value Chains: a Survey of Drivers and Measures contains many important observations and insights although some of its explanations are confused as I have written in the last "answer." Here are some excerpts from it:

• The rise of Global Value Chains (GVCs) has dramatically changed the organization of world production of goods and services in recent decades, making a deep and lasting impact on international trade and investment patterns and affecting competitiveness and macroeconomic developments. (p.278)

• GVCs cannot be perfectly understood with the traditional concepts of comparative advantage applied to countries and broad sectors. (p.278)

• In theoretical terms, a comprehensive framework encompassing the specificities of GVCs is still missing. (p.279)

• GVCs have deeply changed the paradigm of world production, affecting international trade and investment, labour market developments and the way policy-makers interpret trade policies and external competitiveness. (p.294)

• [D]eveloping countries are increasingly participating in different stages of GVCs and these links can play an important role in their economic development. GVCs can facilitate technology dissemination, skill building and industrial upgrading, thus enhancing their productive capacity. (p.295)

• Notwithstanding the substantial work done in recent decades, there are still important research gaps in the empirical literature on GVCs. As for the main drivers of GVCs, little systematic work has been undertaken to estimate the actual contributions of transport and communication costs, technological progress and economic barriers to the development of GVCs, as well as their potential complementarities. (p.295)

• The proper understanding of its drivers is crucial to predict shifts in the dynamics of GVCs, which, in turn, are important to forecast macroeconomic developments and to assess the role, if any, that policy can play in shaping GVCs. (p.295)

Re Yoshinori Shiozawa ‘s post of 19 May.

I could not download the paper, but my feeling is that researchers looking at Global Value Chains from the Production Network perspective use the tools of Social Networks (using the contemporaneous terminology; in my student’s year, the formal analysis of networks was called Graph theory).

Indeed, there are many different approaches to GVC.

The first one is the business approach of value chain, as in Michael Porter (1985). This field branches into two main components: the business approach related to supply chain management (with two sub-branches: practical/legal/managerial aspects and theoretical/Industrial Organization). The other branch is development economics and regional project management based on the notion of industrial/agricultural clusters.

Trade economists and sociologists came second. The first ones are interested in the changes in trade theory required to adapt models to the reality of trade in intermediate inputs, because it changes the way comparative advantages are understood. The second ones are more interested in “who captures the value” in a GVC.

Statisticians started building trade in value-added indicators and world-wide databases in 2010, with the first main ones published in 2012 (WIOD, a EU funded profect, and TiVA by OECD and WTO). This statistical approach works very closely with the community of Input-Output conomists, because they share the same analytical tools.

To close the loop, one may say that the Statistical/Input-Output approach is also a Production Network approach, because an input-output matrix can be expressed as a Graph (in the mathematical sense) and a Social Network can also be expressed as a matrix.

Hope this helps mapping the various analytical fields that are related to GVCs.

Thank you, Hubert Escaith , for a nice summery of the history of GVC research. It range so many different disciplines and very hard to cover all relevant fields.

This diversity of GVC studies of course reflects manifold dimensions of its influences. However, I have an impression that the study became too complicated because international economics could not afford a good framework in which to explain emergence and growth of GVCs.

The unique economic theory of GVCs was theories of vertical fragmentation like the outsourcing theory of Jones and Kierzowski and vertical division of labor within an enterprise (multinational firm) such as Helpman and Markusen. But, this is only an aspect of GVCs. I feel they failed to grasp the whole dimensions of GVCs.

In general, I think economics of all sorts (including critical approaches such as Marxian international political economy) has failed to keep up with the rapid development of TNCs over the last 30-40 years. Has there been any useful general theorising since the 1970s? If there has been, please tell me. Given the huge importance of both TNCs and GVCs, this looks like a colossal failure of the discipline.

Outside the Business Studies field, the most useful textbook that I am aware of is Peter Dickens’ Global Shift: Mapping the Changing Contours of the World Economy (7th edition, 2015). But he is a geographer and its first edition was published about 30 years ago. Incidentally, his equivalent concept to the global value chain is called the global production network.

Thomas Lines

I didn't know the book Global Shift. It was translated into Japanese in 2001. It seem it did not get a good success in Japan and no subsequent translations were published. I have ordered a secondhand book in English. It will arrive in mid July.

You may be right in writing:

• Economics of all sorts has failed to keep up with the rapid development of TNCs over the last 30-40 years.

If I dare say, TNCs are derivatives of GVCs or GPNs. The main reason why economics failed to catch up with the rapid development of world production was the inability of economics to formulate a general theory of international trade. But, international trade theory (this is the traditional name for international microeconomics) changed much in this decade. It may be possible from now on that economics can catch up with the "global shift."

Thanks, Yoshinori. It’s an interesting thought, although I’m not sure if I agree that TNCs are derivatives of GVCs. Surely every GVC is set up by a TNC in the first place - you could say, in the very act of making a single-country company export or produce abroad for the first time. In the longer run, I would think the two were interdependent.

However, your comment suggests to me that we are really missing a coherent theory of the modern international economy as a whole, including an explanation of TNCs and their role. But that makes the theoretical gap look even bigger to me.

Thomas Lines : I fully agree with you: GVCs are a totally different sort of animal than the TNCs, at least the way TNCs were understood in the 1970s.

TNCs comes from the days where bigger was better for business and large firms were getting bigger in order to gain economies of scale. When TNCs were investing abroad, it was usually to secure some preferential market access to a large country, or to secure access to raw material.

The GVC philosophy is entirely different: bigger is not better, at the countary. The big game in GVC management is to outsource secondary tasks and focus the firm on its core business. Offshoring tasks to foreign suppliers (often through contractual arrangements rather than investing abroad) is not (always) to sell in this foreign country but to seize the opportunity of a better deal in order to get the necessary inputs required. And cost is not the only criteria. Quality, reputation, potential for developing a deeper partnership is often more important. For example, an Indian car company will outsource the design of its new car to an Italian designer not to save money, but to benefit from the compararive advantage of Italian designers.

Hubert Escaith

Naturally I agree with your first sentence. However, my explanation would be rather different, as I think the difference arises from the big institutional and policy changes of the last 40 years. It is remarkable that theories have made so little response to them.

The main changes I have in mind are the ending of exchange (or capital) controls in the 1980s and 1990s, the further reduction in tariffs on goods and the creation of the WTO, including the TRIPS and TRIMS Agreements. Financialisation has also played a part.

However, the consequence is well enough known: it’s globalisation. There is now a global economy rather than a series of national ones (which, nevertheless, still form the basis of mainstream theory) and companies can operate internationally with little constraint from national authorities. But there is much less profit now in production, so they seek profits from the exploitation of rents derived from “intangible” assets that they create in the design, marketing and distribution of products; intra-GVC loans add a financial source of rent. To achieve this they do not need to own production processes, except perhaps the most critically important ones, but can retain control with much greater flexibility by the use of outsourcing.

TNCs can therefore play one country off against another, using the manoeuvrability that free flows of capital and outsourcing afford them. Tax havens provide a further advantage. This all leads to competition between countries as much as companies, with reduced corporate taxation and offers of other incentives to get TNCs to operate on their territories.

If I were to write a theory of the modern international economy, all of that would be in it. It would necessarily be a political economy theory and not a narrowly economic one, because economic theory (especially in its dominant modern form) so downplays questions of economic power.

Dear Thomas.

I fully agree with you on the role of intangibles for creating commercial value in today’s globalised world (not only production is global, consumption too). But there is a rich market niche for suppliers: Sodexho became a world leader specialising in the humble job of catering for other firms.

As for voluntarily exploiting developing countries, I am not so sure. My best bet is that transnational corporation don’t give a shit (excuse my French) about exploiting third world proletariat. First, because most of the business to business GVC contracts take place between developped OECD countries that have similar labour costs; second, and more importantly, when they have the opportunity to repatriate labour intensive tasks from developing countries to home because robotics allows to substitute cheap labour, they do it. So, the Leninist story about TNCs exploiting third world proletariat is a bit passé.

The debate between Thomas and Hubert in these 3 days is extremely interesting and I believe it of great importance. It is difficult to digest all points of discussion but I am sure that they are discussing some important points.

One factor that we must take into consideration is surely the change of "philosophy of management" that Hubert mentioned in the post two days ago. The key term may be the idea of “core competence”.

In 1970's, when people started to talk about MNE (Multi National Enterprise) or TNE (Trans National Enterprise), the typical model of MNE was GM, Ford, and Chrysler. When I started to my graduate study in 1970 in France, those companies were trying to extend their European network. I bought an Opel Kadett at secondhand. It was a brand of Vauxhaul, a filial of GM. Ford had Taunus in Germany. Chrisler had just bought French Simca and British Rootes. At that time, French, Italian as well as Japanese governments were still struggling to prevent American companies to take over their market. In these cases, it was the market demand which drove Big Three to establish their branches in Europe or other big markets. After 1970's something happened in the management philosophy. We must know what drove this change of management philosophy or what economic situation and logic made it inevitable.

It seems also necessary to consider that there was a big change of sentiment with regards to foreign capital or multinational enterprises. In 1970's there was still a strong anti-foreign capital sentiment all over the world. A symbolic incident occurred when Japanese Prime Minister Tanaka visited South-East countries in January 1974. He was received by a wave of protesting people in Bangkok, Singapore and Jakarta. When I started to study MNEs in late 1970's, Japanese companies are extending their production plants in Asian countries, first in Korea and Taiwan, and then in Thailand and Malaysia, but the anti-Japanese capital sentiment was very strong in those years. This sentiment changed somewhere in 1980's and, in 1990's, almost all countries started to welcome foreign investment. A similar change of sentiments regarding to American and other foreign enterprises occurred simultaneously.

Somewhere around 1980's people's sentiment as well as philosophy of management changed. Without these two changes, there are no GVCs that pervade everywhere in the world.

Hubert Escaith misunderstood me. My post three days ago did not say anything about exploitation of developing countries, still less about Leninism. My argument refers to all countries. And I am not a Marxist.

To illustrate the point, one of the big issues about leaving the EU in my own country is the likely reduction of TNCs’ operations here as they will lose ready access to the EU’s market. This is made worse by the UK’s subordinate position in many GVCs, especially in manufacturing (the financial sector is an important exception). Pro-“Brexit” politicians are promising further cuts in corporation tax, some of them down to Ireland’s rate of 12%, in order to retain foreign-based TNCs and companies that serve them, in compensation for this disruption of their value chains.

Dear Thomas Lines . Sorry for misinterpreting your comments.

I have nothing against being a Marxist, this said (I wouldn't say the same about being a Leninist).

Back to substance:

The post-Brexit UK has another tool for adjusting its export price: a devaluation of the Pound. But it needs to be relatively high in the case of automobile industry, because a large share of the inputs are imported and a devaluation will lower only the Euro price of the domestic share of the value-added. This said, in the case of the automobile supply chain, the issue is probably systemic and not Brexit-related: this is an industry facing structural challenges and in need of restructuring in the whole Europe (with or without Brexit).

Fiscal devaluation is another way, as you mention. The industry plays its card, and calls for lower taxes (the opposite would be strange). Don't worry, same thing happens in no-Frexit France on social taxes, to lower labour costs and compete with the Germans.

Being politically incorrect, I'd say that in a globalised world where wages and social benefits are very different between trade partners and import duties are bound to be low, the best way to fund government policies is to tax consumption (VAT applies to both domestic and imported goods and does not affect exports), plus personal income (mainly for redistribution purpose).

This said, and returning to your comments, UK competing with the Irish, who blocked a soft Brexit, for attracting Foreign Direct Investment is an ironic way of promoting a post-Brexit convergence in the archipelago and reopening negotiations, isn't it?

I should add that Hubert Escaith’s picture of an apparent decline in TNCs and, if I understood it right, growth in intermediate firms is somewhat partial. There has been a continued steady concentration in corporate ownership throughout this time, with mergers & acquisitions a major part of the financial sector.

In the car industry there is a far smaller number of major firms than in my childhood. None at all are British-owned while in the early 1960s there were several; and in France there are now only two. On touring holidays in the 1960s, it was clearly visible that most cars on French roads were from French companies and those on German roads from German ones, and likewise in Britain and Italy. The same applied to most industries, but it began to change around the time I first studied economics about 1970. About the only major consumer sectors where it still holds true are food retailing and banking.

You find this growing concentration in unexpected places, such as brewing. Despite its simple, long-established technology of manufacture and, one would think, limited economies of scale, brewing is dominated by three global firms; when the first and third largest merged a couple of years ago, they would have counted 29% of world sales if the competition authorities had not forced them to divest a few brands. Just as the Renault-Nissan tie-up might soon include Fiat, so the leading group grew from mergers between firms on several continents (mainly, Stella-Artois in Belgium, Anheuser-Busch in the US, South African Breweries and Interbrew in Brazil). The huge international array of beers on supermarket shelves nearly all come from that circle.

Dear Thomas Lines : With beer, we are entering into serious territory. Indeed, in today's world economy, producing (a beer or a car) is no longer a big issue. Selling it to the Mass Consumer Market remains a challenge, even if e-commerce may help small and medium firms on some niche markets.

The way I see (and drink) it, there is a two-ways trend: concentration, on the one hand, and local micro-breweries, on the other one (id est, one pint in each hand).

This two-track dynamics is quite representative of modern days' consumption patterns in the global economy: big brands and a soft-point for local ones.

From my personal perspective, it has a very positive outcome: even cheaper global brands try to look and taste like true local beers, providing me with affordable alternative to Corona or Heineken coloured sparkling waters.

But I am afraid, we are drifting away from GVCs.

That’s an interesting point from Hubert Escaith. But it would appear that currency depreciation, or devaluation, is less beneficial to a country’s balance of payments than it used to be. This is not due to inflation but the development of GVCs, since companies import so many part-assemblies, components and other supplies - and not only when they are outsourced. This applies even to simple products like Nutella. A lot of the expected benefit from depreciation therefore leaks out into other countries. This is one way in which international economics has changed under globalisation (and governments have lost a major lever of control).

In Britain’s case the change was evident between the depreciations of 1992, when the pound crashed out of the European Monetary System, and 2008. The first pulled Britain out of a deep recession with - very unusually here - an export-led recovery. After the banking crash, the pound again fell sharply but econometric studies concluded that this had only a limited effect on the ensuing recession.

On beer, Hubert Escaith is right of course: as in many sectors, there is a growth in local niche brands, in many sectors (though perhaps not beer) mainly serving higher income groups.

However, I think GVCs undoubtedly apply in the brewing industry. In a local shop I looked at the labels of the two best-known Mexican beers: one was brewed in Mexico and imported from there by the AB-Inbev conglomerate which owned the brewing firm; the other in the Netherlands “under licence” from its Mexican brewery, which was of course owned by Heineken (affording plentiful opportunities for “tax planning” in financial transfers).

(A third beer, called Desperados, is flavoured with tequila and has a strong Mexican theme; it too is made by Heineken, but originally in France by a French firm which Heineken acquired. It has never been Mexican at all, except by association.)

But in global firms of this sort, you can be sure that production, as well as branding and so on, all operate with GVCs: I very much doubt if Mexican beer uses much Mexican barley or hops, since they are temperate crops.

As far as I can see, the curiosity of this industry derives from the very fact that it is an undifferentiated product using a cheap, well-known technology. In the modern economy, how can competition work in that instance? As the Financial Times put it in 2016, “The beer business is, in large part, marketing magic.” There is little other source of product differentiation, and the whole Mexican beer thing is entirely a creation of global marketing. What else could it be?

That being so, the distribution and marketing are held closely in the hands of whichever TNC produces a given beer: they are the main source of rent which enables it to beat its competitors. I think this industry illustrates as well as any how modern TNCs run their GVCs.

Yesterday I found the IMF Working Paper: "The Inflexible Structure of Global Supply Chains" by Tamim Bayoumi, Jelle Barkema and Diego A. Cerdeiro, which rejects the hypothesis of flexibility of GVC (in short and long term).

https://www.imf.org/en/Publications/WP/Issues/2019/09/13/The-Inflexible-Structure-of-Global-Supply-Chains-48562?cid=em-COM-123-39413

Apart from the key topic it is worth to take a closer look at Figure 4, which presents value-added trade and trade in final goods as a ratio of gross trade for individual economies. Analysing the Figure 4 one could compare the position of each economy on the area between vertical axis (importance of domestic goods in a country trade) and horizontal one (the role of final assembly in trade), with country's economy characteristic. The achieved comparison should be helpful in answering the question about the drivers of GVC growth and its further evolution.

Dear Karol Piekarz . Thanks a lot for the interesting reference.

I need to read it more carefully, but I suspect the main issue I have with the paper is their assumption that trade in tasks is driven by relative prices (actually, production costs).It is a mistake in my opinion: cost is only one of the parameters, quality and reliability being much more important when it comes to choosing a supplier.

Actually, most of the inter-industry supply chains involve developed countries with similar labour costs. The race to the bottom is a not the driving force to GVC expansion.

Dear Hubert Escaith , I appreciate your comment.

Let me emphasize that said article by T.Bayoumi, J.Bakema, D.Cedeiro is mainly approaching one specific aspect of GVC, namely: how easily GVC can re-configure in response to changes in prices.

The GVC expansion theory foundations were mentioned in introduction of this question (20 Apr 2018) by Prof. Yoshinori Shiozawa . The comment of Prof. Hubert Escaith about lower importance of production costs (read labour costs) is in my opinion slightly wrong formulated, because last four decades evidence confirms the importance of the cost factor in GVC expansion process,.

The thesis of Prof. Hubert Escaith about importance of other factors is true (On Competition Prof. M.Porter) and positively verified by many business cases (Building a Cluster: Electronics and Information Technology in Costa Rica Niels W. Ketelhohn, Michael E. Porter HBS Sep 2013,).

This economic competitiveness of the country (its attractiveness) has impact on GVC expansion investing decision.

Certainly, the labour-intensive factor will have larger impact in cases when the introduction process of quality standards in new location is not another green field investment, and this risk is mitigated by the availability of skilled work-force on-site of new investment. Following that consideration one smoothly enters country's economic competitiveness factors that are not only linked with relative prices but more with long-term planning strategy (including both macroeconomic and microeconomic issues) and what kind of development opportunities the country, region, town has (infrastructure, education, legal system, culture, demographic, business environment and clusters, central and regional government representatives and institutions and public investment incentives)?

The importance of reliability (or even wider view covering property rights aspects) is another factor analysed by GVC expansion decision makers. However the evaluation of importance of that aspect varies in the decision process of selecting new investment area.

The selection process of countries between ones with effective intellectual property right and ones with less effective or even with dead law letter regarding property issues occurs (pls analyse Chinese investments in Africa).

One should not forget that not every industry weights this aspect (depends in the industry sector) as the crucial one. Even more, sometimes it is taken as the entering market or product dissemination cost.